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War Profiteer of the Month: BAE Systems

Formerly known as British Aerospace, BAE Systems has grown into one of the world’s largest aviation and weapons companies, with major operations not only in the United Kingdom but also in Australia, South Africa, Sweden, Saudi Arabia and the United States, where it is now one of the Pentagon’s largest contractors. BAE is one of the top producers of armored combat vehicles such as the Bradley Fighting Vehicle (widely used by the U.S. military in Iraq), but the company also produces fighter planes, missiles, nuclear submarines, military electronics and other tools of war. In 2008, company sales exceeded £18.5 billion, with about 95 per cent of these being military. For the past few years, the company has been embroiled in a controversy over allegations that it paid bribes to officials in countries ranging from Saudi Arabia to the Czech Republic.

History

In an effort to improve the UK’s competitive position in the international aerospace market, the British government in 1960 arranged for the merger of Vickers-Armstrong, English Electric and Bristol Aeroplane to form the British Aircraft Corp. (BAC), which soon took over other aviation interests in the country. BAC formed a joint venture with France’s Aerospatiale to develop the Concorde supersonic passenger jet. In the late 1960s BAC declined to participate in creation of the European Airbus consortium for commercial jets, but it did join with companies such as Germany’s MBB and Italy’s Aeritalia to work on combat planes.

In 1976 the British government, worried about the future of BAC in light of the financial problems of the Concorde, nationalized the company as well as Hawker-Siddeley Aviation, producer of the Harrier vertical takeoff and landing craft. The following year they and Scottish Aviation were combined to form British Aerospace (BAe). Within a few years, the British government privatized about half of the company and later the rest. During this period BAe joined the Airbus consortium. In the late 1990s BAe purchased a minority stake in Swedish military jet maker Saab AB

In 2000 BAe spent some $13 billion to acquire Marconi Electric Systems, the military portion of Britain’s General Electric Co., thereby propelling itself to the top ranks of the world’s aerospace/military companies. In the wake of that move, the company changed its name to BAE Systems. The next year it merged its missile operations with those of EADS and Finmeccanica to form the joint venture MBDA. In 2000 BAE purchased the Sanders military electronics unit of Lockheed Martin.

In 2005 BAE sold its UK-based avionics unit to Finmeccanica. That same year it completed the largest foreign acquisition of a U.S. defense company when it paid $4 billion to purchase U.S. armored-vehicle producer United Defense Industries, maker of the Bradley Fighting Vehicle (BAE had acquired a similar UK company called Alvis in 2004). The following year, BAE sold its interest in Airbus to EADS. In 2007 BAE increased its U.S. presence by agreeing to acquire Armor Holdings Inc. for about $4 billion.

Accountability overview

For more than five years BAE has been confronted with allegations that the company engaged in widespread bribery in its dealings with foreign governments. The charges began to receive significant attention in June 2003, when The Guardian reported that the U.S. government had privately accused BAE of offering bribes to officials in the Czech Republic. The Guardian went on to report that BAE was facing bribery allegations in three additional countries: India, South Africa and Qatar. Among the charges was that BAE had paid millions of pounds in secret commissions to obtain a huge deal, backed by the British government, to sell Hawk jets to South Africa. There were subsequent allegations that the company had formed a £20 million slush fund (later said to be £60 million) for paying bribes to officials in Saudi Arabia in the 1980s.

Despite denials by the company, Britain’s Serious Fraud Office (SFO) launched a criminal investigation of the bribery charges, focusing on the allegations regarding Saudi Arabia. BAE and the Saudi embassy reportedly lobbied intensively to have the probe terminated, and in December 2006 their effort paid off. The British government called a halt to the case because of national security concerns. (In April 2008 Britain’s High Court ruled that the termination of the investigation was unlawful, but in July 2008 the House of Lords overruled the court.)

The SFO did, however, continue to investigate BAE’s questionable behavior in six other countries. The company was also being investigated by Swiss officials for possible money laundering violations.

Unable to escape these allegations, BAE announced in June 2007 that it would commission its own purportedly independent examination of the issues led by Lord Woolf, former lord chief justice of England and Wales. The Woolf Committee’s 150-page report, released in May 2008, stated that BAE’s top executives “acknowledged that the Company did not in the past pay sufficient attention to ethical standards and avoid activities that had the potential to give rise to reputational damage.” However, the report seems to have bowed to the wishes of the company that the focus be placed on the future rather than the past. The report provided what it called “a route map for the Company to establish a global reputation for ethical business conduct.” Among its 23 recommendations is that BAE “continue to forbid facilitation payments as a matter of global policy.” Given the less than draconian nature of the recommendations, it is no surprise that BAE agreed to adopt all of them.

A new front in BAE’s problems with questionable payments opened in late July 2008, when the Financial Times reported that it had seen documents suggesting that the company had paid at least £20 million to a company linked to a Zimbabwean arms trade close to controversial President Robert Mugabe.

In February 2010 BAE reached settlements with the U.S. Justice Department and the U.K. Serious Fraud Office concerning the longstanding bribery charges. The company agreed to pay $400 million in the U.S. and the equivalent of about $47 million in Britain to resolve the cases.

In late July (2010) the Ministry of Justice proudly announced that the long-awaited Bribery Act will become law in 2011. "The act will ensure the UK is at the forefront of the battle against bribery," it said on Tuesday. The legislation follows a long-term investigation into allegations of corruption against BAE (vigorously denied), and some costly plea bargaining with the authorities on both sides of the Atlantic on the part of the arms company.

But actually the act was supposed to come into force in 2010! It received royal assent in April, nearly 18 months after the law commission's "final report" on bribery recommended the introduction of the new corporate offences.

Transparency International has also expressed disappointment. "The danger is that under the guise of consultation attempts may be made by those who want to pursue 'business as usual' to water down the Bribery Act," it said. It has published its own guidance on the act to help move things along.

Global sales

BAE Systems’ arms sales reached $32.4 billion in 2008. BAE Systems’ move to first place in the Top 100 in the arms industry is notable for a variety of reasons. It is a UK-based company, but its arms sales rely on production that takes place in a number of locations outside the UK. BAE's arms are sold indiscriminately around the world. It has military customers in over 100 countries. Its focus over the past few years has been on increasing sales to the US, specifically targeting equipment for the conflicts in Afghanistan and Iraq, and supplying Eurofighters to the Saudi Arabia regime. Other export deals include sub-systems for Israeli F-16 fighter aircraft and sales to both India and Pakistan.

The main reason that BAE became the largest arms-producing company in the world in 2008 is the increase in its US sales, which outpaced decreases elsewhere including in the UK.

The company’s two largest operating groups (Electronics, Intelligence & Support and Land & Armaments) are headquartered in the USA and contributed 59 per cent of the company’s total sales in 2008.

BAE generated a total of $17.3 billion in sales in the USA, compared with $6.25 billion generated in the UK and $10.5 billion generated elsewhere.

BAE Systems is a major contractor to the US Department of Defense (DOD). In 2008 it ranked fourth in US DOD contract awards and was the only non-US company in the DOD’s top 10 contractors.

Recent foreign acquisitions have contributed to BAE’s total sales, demonstrating the importance of the company’s presence in foreign markets. For example, its acquisition of Tenix has made BAE Systems the largest arms producer in Australia.

A 'UK' company?

BAE is now an international company with seven "home markets". The largest of these is the US, followed by the UK. The others are Australia, Saudi Arabia, Sweden, South Africa and, as of 2009, India. BAE is unlikely to prioritise UK interests. As its Annual Report states, its strategy is "to deliver sustainable growth in shareholder value".

Environment and product safety

BAE received praise as well as some ridicule when it announced in 2006 that it was working on “green” munitions, including lead-free bullets, rockets with fewer toxic components and quieter warheads to reduce noise pollution. The bizarre notion of protecting the planet in the course of killing people was captured by the headline of an article about the project in the Times of London: “Watch Out, Sarge! It’s Environmentally Friendly Fire.”